The $290 Billion Question: Where Will VC Investors Put Their Money in Web3?
VCs are parked in billions as they wait for the macro environment to play out.
U.S. VC investors are sitting on $290 billion in reserves.
In addition, $162 billion is set aside for new investments.
There are billions of dollars outside of VC money not accounted for that are also sitting on the sidelines in the form of sovereign wealth funds, private equity firms, and nontraditional investors.
A large portion of that is going to flow into Web3 social media in early to mid-2023.
Why?
Because Web3 social media has the opportunity to disrupt the $1 trillion digital advertising and social media industry.
Let's break down why I think Web3 social media startups are primed to absorb a massive amount of the billions in dry powder sitting on the sidelines.
First off, what do I consider Web3 social media?
I consider Web3 social media a decentralized version of current big tech giants like Twitter, Facebook, TikTok, YouTube, and Instagram.
Instead of a small group of elites controlling what we see and do online, Web3 puts the power back into the hands of the users and creators—centralized social media rakes in billions in advertising revenue.
This is called the ads-driven business model, and you can read more about it here.
Web3 social media also referred to as decentralized social media, DeSo, and DeSoc, is built on top of a blockchain and has money native features weaved into it. It allows users to own their content and social graph without the risk of getting de-platformed.
Web3 social media protocols are built on blockchains with the crypto core values of permisionlessness, trustlessness, decentralization, and censorship resistance
In the recent Messari crypto trends report, DeSo scored the highest among seven other trends due to the total addressable market value and novelty. The TAM of social media is MASSIVE.
There is an expected 6 billion social media users by 2027 and a rapidly growing creator economy of 50 million looking for new ways to monetize. So it's not enough to simply be able to build an audience to one day have a chance to build a product to monetize.
Instead, creators want to monetize from day one. Also, do you know what the top job gen z intends to do when they grow up? 33% listed influencer as a career path, which naturally lends itself to using creator monetization tools in Web3 social media.
Web3 social media platforms allow creators to earn and monetize on the way to building an audience, not after.
How?
Because blockchains were built for micro-transactions while the internet was built on macro transactions. Big tech is incentivized to protect its ad-revenue model at all costs.
We've seen some of these costs on society play out over the last several years during the pandemic and other events. But, unfortunately, big tech can choose who has a voice and what we should focus on, all for profit.
Imagine if only three restaurants, Mcdonald's, Burger King, and Wendys, controlled the food supply, and they decided what we could and couldn't eat. Then, imagine going to your local market and all the food you could buy was from these three restaurants – You'd be eating french fries and mayo with every meal.
I think you can start to visualize what problems could arise from that.
It's the same thing with social media, and it's starting to cause significant issues. Web3 can decentralize social media the same way Bitcoin and Ethereum decentralized finance.
And that's why a significant portion of the billions sitting on the sidelines will go into Web3 social media protocols. The social media industry is massive and will continue to grow as more of our lives move online.
Web3 social media also helps founders and builders. Current social media platforms started completely open for growth purposes. However, they eventually became walled gardens and shut out all founders and developers—they horde data which stifles innovation and competition.
Because of that, social media is stuck in the stone age. Imagine only driving cars from the 80s vs. vehicles now. There are not only performance issues, but they also pollute the air more than a modern car built today.
Our digital identity is becoming more valuable as more of our lives move online.
Another major trend that points to Web3 social media adoption is the erosion of trust in our institutions. Clearly, the government is either strong-arming social media platforms or outright colluding with them.
A great example of this is Alex Berenson, who got deplatformed for posting data during the pandemic that was labeled as misinformation but turned out to be accurate.
He eventually took them to court and won while getting his account reinstated. How many thousands have gotten de-platformed but did not have the resources to fight?
This is dangerous. Imagine if, in medieval days, the world's greatest thinkers, scientists, philosophers, and artists were removed from the population for thinking outside the box.
Another example is the Krassenstein twins, who once had 1.2 million followers on Twitter.
They were banned from Twitter and never made a dime. They now earn hundreds a day posting on a Web3 social media platform called Diamond with a fraction of the followers they once had on Twitter.
People want a change, and Web3 social media is it. There is an attack on our privacy, and now people want to take that back.
The last major trend I've noticed is that Web3 is taking talent away from big tech. People are evaluating their work and are seeking something more meaningful outside of making shareholders rich. Web3 allows people to build for communities instead of corporations.
This talent drain will accelerate as more big brands experiment with Web3 protocols and tools. For example, Starbucks is implementing NFTs into its rewards programs. There will be many more examples of this over time.
Web3 lacks a social layer as most content can't be stored on a blockchain. However, with blockchains like DeSo, that's all starting to change. As the social layer of Web3, DeSo has an opportunity to make Web3 ecosystems social and help get everyone off Web2 platforms like Discord.
So, why are VCs sitting on so much dry powder?
The global macro environment forced VCs to sit on their hands, waiting patiently in cash.
The war, inflation, election uncertainty, interest rate hikes, tightening, energy prices, and massive stock selloffs have all played a part.
However, they can only wait for so long.
2023 appears to be when all that money finds a home.
There are clues everywhere:
Bessemer Venture Partners: $3.85 billion fund
Andressen Horowitz: $4.5 billion fund
Founders fund: $5 billion fund
$13.35 billion needs to find a home, and the cracks are beginning to show.
Several bonus clues outside of VC point to 2023 when capital flows into Web3 social media.
Adobe just bought @figma for $20 billion in a bear market. Adobe and Figma aren't Web3, but $20 billion is a massive amount of money to pay for Figma during what many call one of the worst macro backdrops ever.
Additionally, Blackrock is offering Bitcoin to institutional clients. Bitcoin isn't Web3. However, it's an entry point for many who eventually interact with other crypto projects.
Institutions are itching to ape, and many will do so after the midterms in early 2023.
Also, do you remember DeFi summer?
The institutional apes who missed it will look for the next big trend. Even the ones who participated are actively looking for the next big thing.
And that next big trend could be Web3 social, Decentralized Social, DeSo, etc.
DeFi protocols were forged in the fire of the 2018 - 2019 bear market.
Just like the decentralized social protocols and apps being built today.